Last week, CFTC Chairman Gary Gensler and European Commissioner Michel Barnier issued a joint statement on the Financial Reform Agenda. They reiterated the need for strong international cooperation. “Risk knows no geographical boundaries” was the refrain.
Washington, DC –United States Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and European Commissioner Michel Barnier spoke today and reaffirmed their strong determination to cooperate closely in strengthening the global financial system. Specifically, Chairman Gensler and Commissioner Barnier discussed regulatory reform of the over-the-counter (OTC) derivatives markets with respect to Dodd-Frank Wall Street Reform and Consumer Protection Act and the September 2010 European proposal for a Regulation on OTC derivatives, central counterparties and trade repositories.
Commissioner Barnier and Chairman Gensler discussed a number of issues pertaining to enhancing oversight and reducing risk in the OTC derivatives market including: (i) comprehensively regulating derivatives dealers for capital and margin, recordkeeping and reporting and business conduct standards; (ii) requiring standardized OTC derivatives to be cleared by central counterparties, imposing stringent prudential and organization rules for central counterparties and imposing risk mitigation standards for non-standardized contracts that are not centrally cleared; and (iii) increasing transparency of the OTC
Derivatives markets through trading, where appropriate reporting to data repositories and reporting to the public. Commissioner Barnier and Chairman Gensler emphasized the need for international co-operation to ensure global access to all data on derivatives transactions maintained by trade repositories.
Chairman Gensler and Commissioner Barnier shared the view that because capital and risk know no geographic boundaries, the nature of today’s marketplace demands a coordinated, international approach. The Chairman and Commissioner committed themselves to working across borders to achieve the goals set forth by G-20 leaders with respect to strengthening OTC derivatives regulation.
Commissioner Barnier and Chairman Gensler also discussed the utility of position limits as a critical element in the regulatory toolkit for the oversight of physical commodity markets as well as other derivatives products, as such limits can promote fair and orderly markets and restrict the ability of a trader to hold an excessively concentrated position.
After speaking with Commissioner Barnier, Chairman Gensler stated that: “Today’s discussion built on the strong partnership that I have enjoyed with Commissioner Barnier. Based on the European Commission’s proposal for regulatory reform of the swaps marketplace as well as the Dodd-Frank Act passed in the U.S., I am confident that we will bring strong and consistent regulation to both the European and U.S. swaps markets. My staff is consulting frequently with Commissioner Barnier’s staff. We look forward to continued cooperation and coordination as both the U.S. and Europe implement comprehensive oversight of the swaps markets.”
Commissioner Barnier stated that: “We have proven on OTC derivatives regulation that close transatlantic cooperation can work. It’s essential – across the board on all financial regulation – that the United States and Europe move in parallel and that we don’t create new space for regulatory arbitrage. That’s why I look forward to continuing to work closely together with Chairman Gensler, and his colleagues, to ensure robust implementation of the G-20 commitments.”
Derivatives are meant to help lower risk and make it easier to discover the price of risks and assets. But unregulated derivatives heightened and concentrated risk and lessened transparency, making it harder to price risks and assets. US taxpayers bailed out AIG with $180bn when that company’s ineffectively regulated $2,000bn derivatives portfolio, managed from London and cancerously interconnected to other financial institutions, nearly brought down the financial system. As we later learnt, much of the bail-out money flowed through AIG to US and European banks. The recent chill winds affecting the euro have further revealed how derivatives can be used by a sovereign country, such as Greece, to borrow from a financial institution, while obscuring the embedded loan.
(source: “How to stop another derivatives inferno,” Gary Gensler, Financial Times Op-Ed, February 24 2010. – http://www.ft.com/cms/s/0/3b52b642-217c-11df-830e-00144feab49a.html)
Read the whole thing because literally your livelihood might depend on it.